Taking a Shine to Gold Stocks

By

John Kimelman

Updated Nov. 9, 2004 11:59 p.m. ET

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A WEAK DOLLAR AND GEOPOLITICAL TENSIONS have been conspiring lately to help gold stocks. And according to Shanquan Li, manager of
Oppenheimer Gold & Special Minerals Fund,
there's more good news for gold companies ahead. Li, along with other gold managers, expects the yellow metal -- currently trading at $435 an ounce -- to hit or top $450 by the end of next year. That's particularly good news for gold mining companies that are unhedged against the rising price of their own product. That also could be good news to a several large gold mining companies in Li's account, including Newmont Mining and Placer Dome. Recently, Li, a native of China who spends his free time playing full-court basketball, filled us in on his off-court passion.

Barron's Online:Gold has had a decent run since the presidential election. What's your outlook for gold prices in the coming year?Li: The dollar will probably continue its down trend and the dollar is the key factor driving gold prices. (Editor's note: The price of gold and the value of the dollar have a strong inverse relationship: As one rises, the other usually falls.) The dollar is getting weaker and weaker as the U.S. trade deficit rises. And this trend is going to last much longer.

Q:What other factors are impacting gold besides a weakening dollar? A: The other important factor that will help gold prices is the shaky geopolitical situation. If you talk about Iraq, I think the situation there will get better, but it looks like the confidence is not that high worldwide that it will.

Q:So what's your forecast for gold, bearing in mind that $430 an ounce is a resistance level that hasn't been exceeded for several years? (See Getting Technical, Sector Alert: "Gold Stocks Are Good But Tired," November 8.) A: I am saying about $450 an ounce by the end of 2005.

Q:Let's talk about some individual gold stocks. What have you been buying lately for your portfolio? A:Novagold Resources
(NG). I started buying it about two months ago I had been watching it for a while before that. It is a good story. They have deposits mostly in Alaska and nearby in Canada, in the Yukon and in British Columbia. So, there is no political risk like there are in some many of the countries where gold is mined. Secondly, they have very experienced management

Q:Is Placer Dome still your biggest position?A: Yes, it continues to be about 6% of the portfolio.

Q:Placer Dome has outperformed the largest gold producer, Newmont, in recent months. Why is that? A: Six month ago,
Placer Dome
was trading similarly to
Newmont Mining,
the nation's largest gold producer, or maybe a bit behind Newmont. Investors did not like Placer Dome because of its hedge book that was similar to Barrick Gold's. However, in the last six months, Placer Dome's aggressive de-hedging, solid reserves and its potential growth story caused [it] to outperform.

Fund Facts

Name of Fund Oppenheimer Gold & Special Minerals (OPGSX)

Assets:

$372 million

Expense Ratio:

1.27%

Front Load:

5.75%

Annual Portfolio Turnover:

108%

Yield:

3.72

Top 10 Holdings

Top Holdings as of 9/30/04

% Inv. Assets

Placer Dome, Inc.

6.5

Newmont Mining Corp. (Holding Co.)

6.4

Glamis Gold Ltd.

5.5

Newcrest Mining Ltd.

5.2

AngloGold Ashanti Ltd., (ADR)

4.8

Freeport-McMoRan Copper &amp; Gold, Inc., Cl. B

4.7

Companhia de Minas Buenaventura SA, (ADR)

4.6

Barrick Gold Corp.

4.5

Impala Platinum Holdings Ltd.

4.2

Randgold Resources Ltd. (ADR)

3.6

Source: Morningstar, Oppenheimer Funds

Q:So, investors began to realize that Placer Dome was more of a play on the price of gold than it had formerly been? A: Yes. But secondly, investors like that are really diversified worldwide. They are everywhere from Australia to Canada. With all these reserves, they are in good shape.

Q:The stock has had a nice run. Have you been trimming your position in Placer Dome at all? A: No, I have not trimmed. Based on its net present value, I don't think it's overvalued. When the price of gold goes up, we have to alter the net present value of the company. If the gold price continues going up -- let's say it reaches the target of about $450 -- I think Placer Dome should be going up another 10% or so. If gold starts to fall in value, I may start to think about trimming the position.

Q:Is it better to own gold companies that don't hedge the price of gold than to own those that do? After all, many people own gold stocks as a hedge against movement of the rest of the stock market, so why would you want to hedge the hedge? A: There can be benefits to both owning gold companies that don't hedge the price of gold and those that do. When gold prices go up, everyone dislikes the hedgers and prefers the most leveraged stories -- as in the recent market environment. However, I spoke to some analysts and gold producers lately who believe that, down the road at some point, some producers will start to hedge again. Indeed, when gold prices are heading downward, gold companies that hedge will do better in general.

Q:What percentage of the total portfolio assets now is in gold versus non-gold stocks? A: My fund is designed to run in two pieces, one is gold and the other is other metal and minerals. Now, the fund is 90% weighted in gold stocks.

Q:How long has your position in gold stocks gotten on a percentage basis? A: It's gotten down to 70%. That was two or three years ago. But I am bullish on gold now.

Q:Which gold company that you own has the lowest costs when it comes to producing gold? A:Newcrest Mining.
Newcrest is the largest producer in Australia and is the only company in my portfolio from that country. Based on the latest fiscal year, Newcrest's operating margin is 24.9%, wheras a company like Newmont has an operating margin of about 22%. And those margins are better than many others. Newcrest also has a high return on equity of 13 percent.

Q:What percentage of the average investor's assets in the markets should be in gold stocks or a fund that invests in such stocks? A: At least 5% to 10%.

Education: B.A. in Statistics and Management Planning, People's University of China, Beijing; M.A. in International Finance and Economics, Brandeis University; Completed all requirements except a dissertation for a Ph.D. in Economics, Boston University.

Hobbies: Playing full-court basketball a few days a week; watching the New York Knicks and New Jersey Nets.

Investment Philosophy

In the realm of gold fund managers, Li falls on the conservative end of the spectrum. He keeps his fund's portfolio weighted toward larger, low-cost gold mining companies and he seldom holds more than 5% of the total portfolio in any one name. He also likes to have some gold companies that hedge the price of gold to help mitigate the damage of falling gold prices. As a result, his fund tends to lag the gold fund pack during rallies but outperforms during down markets.

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